PAGE 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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Commission file number 1-40
----------------------------------------------
PACIFIC ENTERPRISES
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 94-0743670
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Ash Street, San Diego, California 92101
- --------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(619) 696-2000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- -----
Common stock outstanding: Wholly owned by Sempra Energy
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PACIFIC ENTERPRISES AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME(unaudited)
(In millions of dollars)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1998 1997 1998 1997
---- ----- ---- ----
Revenues:
Operating revenues $581 $592 $1,250 $1,386
Other 4 6 13 15
---- ---- ----- -----
Total revenues 585 598 1,263 1,401
---- ---- ----- -----
Expenses:
Cost of gas distributed 168 162 458 506
Operating expenses 283 221 480 470
Depreciation and amortization 64 64 128 128
Franchise fees and other taxes 26 22 55 50
Preferred dividends of subsidiaries -- 1 1 3
---- ---- ----- -----
Total operating expenses 541 470 1,122 1,157
---- ---- ----- -----
Income Before Interest
and Income Taxes 44 128 141 244
Interest 16 25 35 51
---- ---- ----- -----
Income Before Income Taxes 28 103 106 193
Income Taxes 16 46 54 86
---- ---- ----- -----
Net Income 12 57 52 107
Dividends on Preferred Stock 1 1 2 2
---- ---- ----- -----
Earnings Applicable to
Common Stock $11 $56 $50 $105
==== ==== ===== =====
See Notes to Consolidated Financial Statements.
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PACIFIC ENTERPRISES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
(In millions of dollars)
June 30 December 31
1998 1997
(unaudited)
---------- ---------
Current Assets:
Cash and cash equivalents $ 56 $ 153
Accounts and notes receivable 419 530
Income taxes receivable 77 3
Regulatory balancing accounts - net -- 355
Deferred income taxes 23 --
Inventories 34 41
Prepaid expenses 12 21
----- -----
Total current assets 621 1,103
----- -----
Property, Plant and Equipment 6,161 6,097
Less Accumulated Depreciation and
Amortization 3,060 2,943
------ ------
Total property, plant and
equipment - net 3,101 3,154
------ ------
Deferred Charges and Other Assets:
Other investments 142 191
Other receivables 158 62
Regulatory assets 392 394
Other assets 79 73
------ ------
Total deferred charges and
other assets 771 720
------ ------
Total $4,493 $4,977
====== ======
See Notes to Consolidated Financial Statements.
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PACIFIC ENTERPRISES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDER EQUITY
(In millions of dollars)
June 30 December 31
1998 1997
(unaudited)
--------- ----------
Current Liabilities:
Short-term debt $ 49 $ 354
Long-term debt due within one year 1 148
Accounts payable 393 437
Accrued interest 49 52
Deferred income taxes -- 7
Taxes payable 21 30
Regulatory balancing accounts - net 62 --
Other 93 87
----- ------
Total current liabilities 668 1,115
Long-Term Debt 1,059 988
Debt of Employee Stock Ownership Plan 130 130
----- -----
Total long-term debt 1,189 1,118
----- ------
Deferred Credits and Other Liabilities:
Customer advances for construction 30 34
Post-retirement benefits other than pensions 207 217
Deferred income taxes 280 272
Deferred investment tax credits 59 61
Other deferred credits 404 413
Other long-term liabilities 209 183
----- ------
Total deferred credits and
other liabilities 1,189 1,180
----- ------
Preferred Stock of Subsidiary 20 95
----- ------
Shareholder's Equity:
Capital stock:
Preferred 80 80
Common 1,091 1,064
------ ------
Total capital stock 1,171 1,144
Retained earnings 302 372
Deferred compensation relating to
Employee Stock Ownership Plan (46) (47)
------ ------
Total shareholder's equity 1,427 1,469
------ ------
Total $4,493 $4,977
====== ======
See Notes to Consolidated Financial Statements.
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PACIFIC ENTERPRISES AND SUBSIDIARIES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS(unaudited)
(In millions of dollars)
Six Months Ended
June 30
-----------------
1998 1997
------ ------
Cash Flows from Operating Activities:
Net Income $ 52 $ 107
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 128 128
Deferred income taxes 6 8
Other (1) 5
Net change in other working capital
components 368 79
------ -----
Net cash provided by operating
activities 553 327
------ -----
Cash Flows from Financing Activities:
Common dividends paid (97) (61)
Preferred dividends paid (2) (2)
Payment on long-term debt (151) (172)
Increase(decrease)in short-term debt (305) 2
Issuance of long-term debt 75 --
Sale of common stock 27 9
Redemption of preferred stock of a subsidiary (75) (42)
------- ------
Net cash used in financing activities (528) (266)
------- ------
Cash Flows from Investing Activities:
Expenditures for property, plant and
equipment (72) (106)
Increase in other investments (70) (33)
Decrease in other receivables, regulatory
assets and other assets 20 34
------ -----
Net cash used in investing activities (122) (105)
------ -----
Decrease in Cash and Cash Equivalents (97) (44)
Cash and Cash Equivalents, beginning of period 153 256
------ ------
Cash and Cash Equivalents, end of period $ 56 $ 212
====== ======
Supplemental Disclosure of Cash Flow Information:
Income tax payments, net of refunds $ 153 $ 69
====== ======
Interest payments, net of amount capitalized $ 38 $ 67
====== ======
Supplemental Schedule of Noncash Activities:
Dividend of property to Sempra Energy $ 23 $ --
====== ======
See Notes to Consolidated Financial Statements.
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PACIFIC ENTERPRISES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. GENERAL
This Quarterly Report on Form 10-Q is a filing of Pacific
Enterprises (PE), the parent company of Southern California Gas
Company (SoCalGas). The financial statements presented herein
represent the consolidated statements of PE and its subsidiaries.
The accompanying consolidated financial statements have been
prepared in accordance with the interim-reporting requirements of
Form 10-Q. This quarterly report should be read in conjunction with
PE's 1997 Annual Report on Form 10-K which includes the financial
statements and notes thereto, its Quarterly Report on Form 10-Q for
the three months ended March 31, 1998, and the Current Report on
Form 8-K filed by Sempra Energy (Commission no. 1-14201) with the
Securities and Exchange Commission on June 30, 1998 in connection
with the completion of the business combination of Pacific
Enterprises and Enova Corporation.
Results of operations for interim periods are not necessarily
indicative of results for the entire year. In the opinion of
management, the accompanying statements reflect all adjustments
which are necessary for a fair presentation. These adjustments are
of a normal recurring nature. Certain changes in account
classification have been made to prior presentations to conform to
the current financial statement presentation.
In conformity with generally accepted accounting principles,
SoCalGas' accounting policies reflect the financial effects of rate
regulation authorized by the California Public Utilities Commission
(CPUC). SoCalGas applies the provisions of the Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation" (SFAS 71). This statement requires
cost-based rate regulated entities that meet certain criteria to
reflect the authorized recovery of costs due to regulatory
decisions in their financial statements. The Company continues to
meet the criteria of SFAS 71 in accounting for its regulated
operations.
2. BUSINESS COMBINATION
On June 26, 1998 (pursuant to an October 1996 agreement), Enova
Corporation (Enova), and Pacific Enterprises combined the two
companies into a new company named Sempra Energy. As a result of
the combination, (i) each outstanding share of common stock of
Enova was converted into one share of common stock of Sempra
Energy, (ii) each outstanding share of common stock of PE was
converted into 1.5038 shares of common stock of Sempra Energy and
(iii) the preferred stock and/or preference stock of Enova's
principal subsidiary, San Diego Gas & Electric Company (SDG&E), PE
and SoCalGas remain outstanding. Additional information on the
business combination is discussed in the Current Report on Form 8-K
filed by Sempra Energy (Commission no. 1-14201) on June 30, 1998
and incorporated herein by reference.
Expenses incurred in connection with the business combination are
$32 million and $7 million, after-tax, for the six-month periods
ended June 30, 1998 and 1997, respectively. These costs consist
primarily of employee-related costs, and investment banking, legal,
regulatory and consulting fees.
3. CONTINGENT LIABILITIES
QUASI-REORGANIZATION. During 1993, the Company completed a
strategic plan to refocus on its natural gas utility and related
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businesses. The strategy included the divestiture of the Company's
merchandising operations and all of its oil and gas exploration and
production business.
In connection with the divestitures, the Company effected a quasi-
reorganization for financial reporting purposes, effective December
31, 1992. Certain of the liabilities established in connection
with discontinued operations and the quasi-reorganization will be
resolved in future years. As of June 30, 1998, management believes
the provisions previously established for these matters are
adequate.
4. COMPREHENSIVE INCOME
In conformity with generally accepted accounting principles, the
Company has adopted Statement of Financial Accounting Standards No.
130 "Reporting Comprehensive Income." Comprehensive income for the
three-month and the six-month periods ended June 30, 1998 and 1997
was equal to net income.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements contained in this Form 10-Q and Management's
Discussion and Analysis contained in the Company's 1997 Annual
Report to Shareholders and incorporated into the Company's 1997
Annual Report on Form 10-K.
INFORMATION REGARDING FORWARD-LOOKING COMMENTS
The following discussion includes forward-looking statements within
the definition of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. The words
"estimates", "believes", "expects", "anticipates", "plans" and
"intends," variations of such words, and similar expressions are
intended to identify forward-looking statements that involve risks
and uncertainties. These statements are necessarily based upon
various assumptions involving judgments with respect to the future
including, among others, national, regional and local economic,
competitive and regulatory conditions, technological developments,
inflation rates, interest rates, energy markets, weather
conditions, business and regulatory or legal decisions, and other
uncertainties, all of which are difficult to predict and many of
which are beyond the control of the Company. Accordingly, while
the Company believes that the assumptions are reasonable, there can
be no assurance that they will approximate actual experience, or
that the expectations will be realized.
BUSINESS COMBINATION
See Note 2 of the notes to consolidated financial statements.
CAPITAL RESOURCES AND LIQUIDITY
Cash flows from operations increased $226 million from the
corresponding period in 1997. The increase is primarily due to gas
costs' being lower than amounts collected in rates (resulting in a
decrease in previously undercollected regulatory balancing
accounts) and an increase in gas volumes sold.
Expenditures for property, plant and equipment are estimated to be
$200 million in 1998, will be financed primarily by internally
generated funds, and largely will represent investment in SoCalGas
operations.
Investments of $70 million for the six-month period ended June 30,
1998 represent additional investment in Argentine utility
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operations and the acquisition of CES/Way International, Inc.,
which is discussed further below. Investments of $33 million for
the six-month period ended June 30, 1997 represent investments in
energy joint ventures.
Cash used for financing activities increased due to greater long-
term and short-term debt repayments and the repurchase of SoCalGas'
Preferred Stock. On February 2, 1998, SoCalGas redeemed all
outstanding shares of 7 3/4% Series Preferred Stock for a total
cost of $75 million, including unpaid dividends.
The common stock dividend increase in 1998 is due to the
accelerated payment of the third-quarter dividend and increases in
the quarterly dividend rate. The quarterly dividend rate was
increased to $.40 per share in the second quarter of 1998 and was
increased to $.38 per share in the second quarter of 1997.
The cash and cash equivalents at June 30, 1998 are available for
investment in new energy-related domestic and international
projects, the retirement of debt, and other corporate purposes.
CONSOLIDATED RESULTS OF OPERATIONS
Consolidated earnings consist primarily of the results from
SoCalGas. SoCalGas' net income for the six-month period ended June
30, 1998 decreased to $65 million from $132 million in 1997,
primarily due to the lower base margin established in the
Performance Based Regulation (PBR) decision which became effective
on August 1, 1997 (see below) and the business combination costs
discussed in Note 2 of the notes to consolidated financial
statements.
Also contributing to lower net income were operating losses at two
joint ventures with Enova: Sempra Energy Solutions and Sempra
Energy Trading. In addition, Pacific Enterprises International had
greater operating costs in the three-month and six-month periods
ended June 30, 1998 compared to the corresponding periods of 1997,
from efforts to develop international operations.
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SOCALGAS OPERATIONS
The table below compares the Company's throughput and revenues by
customer class for the six-month periods ended June 30, 1998 and
1997.
Transportation
Gas Sales and Exchanges Total
------------------- ------------------- -------------------
Throughput Revenue Throughput Revenue Throughput Revenue
(Revenues in millions of dollars, volume in billion cubic feet)
------------------- ------------------- -------------------
1998:
Residential 154 $1,153 2 $ 7 156 $1,160
Commercial and industrial 43 259 157 136 200 395
Utility electric
generation 40 20 40 20
Wholesale 74 30 74 30
Exchange 3 3
------------------- ------------------- -------------------
Total in rates 197 $1,412 276 $193 473 1,605
Balancing accounts and other (363)
-------
Total operating revenues $1,242
=======
1997:
Residential 128 $ 866 1 $ 5 129 $871
Commercial and industrial 44 280 149 124 193 404
Utility electric
generation 56 28 56 28
Wholesale 69 31 69 31
Exchange 2 1 2 1
------------------ ------------------- -------------------
Total in rates 172 $1,146 277 $189 449 1,335
Balancing accounts and other (32)
------
Total operating revenues $1,303
======
The decrease in year-to-date operating revenues is primarily due to
the margin reduction established in PBR and lower prices for gas.
The increase in total throughput was primarily due to colder
weather in 1998 compared to 1997.
The decrease in the cost of gas is primarily due to a decrease in
the average cost of gas purchased to $2.11 per thousand cubic feet
(MCF) for the six-month period ended June 30, 1998, compared to
$2.45 per MCF in the corresponding period of 1997. Under the
current regulatory framework, changes in revenue resulting from
core market changes in volumes and cost of gas do not affect net
income.
The $69 million increase in SoCalGas' operating and maintenance
expense is primarily due to the business-combination costs
discussed in Note 2 of the notes to consolidated financial
statements and the favorable settlements of contingencies in the
first half of 1997.
Recent CPUC Regulatory Activity
Under the Gas Cost Incentive Mechanism (GCIM), SoCalGas can recover
all costs within the "tolerance band" above the benchmark price and
refunds all savings within the tolerance band below the benchmark
PAGE 10
price. The cost of purchases or savings outside the tolerance band
is shared equally between customers and shareholders.
SoCalGas' gas costs were below the specified GCIM benchmark for the
annual period ended March 1997. In June 1997 SoCalGas filed a
motion with the CPUC requesting a reward for shareholders under the
procurement portion of the incentive mechanism. A reward of $11
million was approved by the CPUC in June 1998 and is included in
income for the three-month period ended June 30, 1998.
The CPUC has approved the use of gas futures for managing risks
associated with the GCIM. SoCalGas enters into gas futures
contracts in the open market on a limited basis to mitigate risk
and better manage gas costs.
Regulatory Activity Influencing Future Performance
On July 16, 1997, the CPUC issued its final decision on the
Company's application for PBR, which was filed with the CPUC in
1995.
PBR replaces the general rate case and certain other regulatory
proceedings through December 31, 2002. Under PBR, regulators allow
future income potential to be tied to achieving or exceeding
specific performance and productivity measures, rather than relying
solely on expanding utility rate base in a market where the Company
already has a highly developed infrastructure. Key elements of the
PBR include a reduction in base rates, an indexing mechanism that
limits future rate increases to the inflation rate less a
productivity factor, a sharing mechanism with customers if earnings
exceed the authorized rate of return on rate base, and rate refunds
to customers if service quality deteriorates.
SoCalGas implemented the base-margin reduction on August 1, 1997,
and all other PBR elements on January 1, 1998. The CPUC intends
the PBR decision to be in effect for five years; however, the CPUC
decision allows for the possibility that changes to the PBR
mechanism could be adopted in a decision to be issued in the
Company's 1998 Biennial Cost Allocation Proceeding (BCAP)
application which is anticipated to become effective August 1,
1999.
Under PBR, annual Cost of Capital proceedings are replaced by an
automatic adjustment mechanism if changes in certain indices exceed
established tolerances. The mechanism is triggered if interest
rates increase or decrease by more than 150 basis points and are
forecasted to vary by at least 150 basis points for the next year.
If this occurs, there would be an automatic adjustment of rates for
the change in the cost of capital according to a pre-established
formula which applies a percentage of the change to various capital
components.
For 1998, SoCalGas is authorized to earn a rate of return on common
equity of 11.6 percent and a 9.49 percent return on rate base, the
same as in 1997.
The Company has considered the effect of Statement of Financial
Accounting Standard No. 121 "Accounting for the Impairment of Long-
Lived Assets and Long-Lived Assets to Be Disposed Of" (SFAS 121) on
its financial statements, including the potential effect of
electric industry restructuring. Although the Company believes
that the volume of gas transported may be adversely impacted by
electric restructuring, it is not anticipated to result in an
impairment of assets as defined in SFAS 121 because the expected
undiscounted future cash flows from SoCalGas' gas transportation
infrastructure are greater than the assets' carrying amount.
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OTHER OPERATIONS
Sempra Energy Solutions
Sempra Energy Solutions (Solutions), formed in 1997 and owned
equally by PE and Enova, incorporates several existing unregulated
businesses from each of PE and Enova. It is pursuing a variety of
opportunities, including buying and selling natural gas for large
users, integrated energy management services targeted at large
governmental and commercial facilities and consumer market products
and services such as earthquake shutoff valves. CES/Way
International, Inc. (CES/Way) acquired by Solutions in January 1998
provides energy-efficiency services including energy audits,
engineering design, project management, construction, financing and
contract maintenance.
Energy Management Services
Energy Management Services (EMS) contributed a significant portion
of its activities to Solutions and is considering contributing its
remaining activities to other subsidiaries of Sempra Energy in the
near future. Other than Solutions, EMS's activities include an
interstate pipeline and centralized heating and cooling plants.
Sempra Energy Trading
Sempra Energy Trading Corp. (Trading), jointly acquired by the
Company and Enova on December 31, 1997, is a leading natural gas
and power marketing firm headquartered in Greenwich, Connecticut.
PE's share of Trading's results was a net loss of $3 million for
the six-month period ended June 30, 1998. The loss was primarily
due to the amortization of costs associated with the purchase of
Trading.
International Operations
In March 1998, PE increased its existing investment in two
Argentine natural-gas utility-holding companies (Sodigas Pampeana
S.A and Sodigas Sur S.A.) by purchasing an additional 9-percent
interest for $40 million. With this purchase, PE's interest in the
holding companies was increased to 21.5 percent.
The net loss for international operations was $5 million for each
of the six-month periods ended June 30, 1998 and 1997.
Other
Consolidated results benefited from the lower interest expense,
which was due to the favorable resolution of contingencies and
lower levels of debt.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 27 - Financial Data Schedules
27.1 Financial Data Schedule for the six months ended
June 30, 1998 for PE.
(b) Reports on Form 8-K
A Current Report on Form 8-K filed on July 1, 1998 announced the
completion of the business combination between Enova Corporation
and Pacific Enterprises, and the related changes in control.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly cause this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PACIFIC ENTERPRISES
-------------------
(Registrant)
Date: August 14, 1998 By: /s/ F. H. Ault
------------------------------
F. H. Ault
Vice President and Controller
UT
